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Defer Tax on Severance or
Retiring Allowance

Income Tax Act s. 60(j.1)

If you are receiving
severance or retiring allowance in relation to employment that was started
prior to 1996, then a portion of amounts received can be transferred directly to a
Registered Retirement Savings Plan (RRSP), so that income tax need not be deducted. This portion
is considered an "eligible retiring allowance". The allowed transfer
amounts are:

$2,000 for each year or part year of service with the
employer before 1996, and

an additional $1,500 for years of service which occurred
before 1989, in which the employer's contributions to a company pension plan
had not vested in the employee. Thus, up to $3,500 per year can be
transferred for years of service prior to 1989.

The total amount transferred to the RRSP cannot exceed
the severance or retiring allowance received. RRSP contribution room
is not needed in order to do the transfer.

Years of part time employment
also qualify as years of service. Even if only one day is worked in
the year this qualifies as a year of service.

If the severance or retiring
allowance is not transferred directly into an RRSP, the qualifying amount
can still be contributed to the RRSP in order to be allowed as a deduction
on the tax return for the year it was received. To qualify, the
contribution must be made within 60 days of the end of the calendar year in
which it was received.

Claiming the Eligible Retiring
Allowance on Your Tax Return

Your T4 will include the
eligible retiring allowance in box 66 or box 68. Non-eligible retiring
allowances are in box 67 or 69. The box 66 amount will go on line 130 of
your tax return. It must also be included in 2 places on Schedule 7 of
your tax return:

on line 2 or 3 as a
contribution, depending on the date of the transfer, and

on line 14 as a Designated
Transfer

Once Schedule 7 is completed, the eligible retiring allowance
is deducted on Line 208 (RRSP/PRPP deduction). If Schedule 7 is not
completed as above, tax will be calculated on the eligible retiring allowance.